Central Bank of Barbados
 
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Press Release April 24 1998


REVIEW OF THE FIRST QUARTER OF 1998
 

Real economic growth in Barbados was estimated at 4.7% during the first quarter of 1998, compared with an average of 4.1% for the same period in 1996 and 1997. The export sectors continued to be the economy’s mainstay, expanding by 6.9%, following growth rates of 9.1% and 1.6% in 1996 and 1997, respectively. Activities which use foreign exchange grew by 3.5%, a slightly higher rate of growth than that recorded one year earlier.


Real GDP growth rates
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The buoyancy of tourism, with output rising by almost 17%, was responsible for the expansion in the foreign exchange earnings sectors. The increase in long-stay visitors (14%) was well above the average for the comparable period from 1995 to 1997. One major factor was the large number of U.K. tourists coming to witness the cricket matches between the West Indies and England. There were also increased arrivals from the US,

the newer European markets and Caricom. The number of visitors from Germany fell, though by less than for last year, and the decline in tourists from Canada reversed the gains that were made in the first quarter of 1997.


Tourism Arrivals by Market
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The number of cruise passenger arrivals declined by 2.2%. More ships are now departing from Miami instead of Puerto Rico and the increased length of the voyage has resulted in fewer vessels visiting Barbados. Nevertheless, tourism’s performance is the best on record since 1994, when, again because of cricket, real output in the sector grew by 18.7%.


Sugar Production
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Sugar production fell by 19.5% to 26,000 tonnes - the first decline in three years - because of prolonged drought in the 1997 growing season. The unusually dry weather also adversely affected food crops and milk production, resulting in a 2.6% decline in output of non-sugar agriculture. In manufacturing, output rose by 1.8% during the first quarter. This reversal of the situation one year earlier, was made possible by increased production of processed foods, beverages and chemicals.

Growth in the non-traded sectors was more broad-based. Construction expanded by an estimated 5.5% - the fifth consecutive quarter of growth of this magnitude - as the momentum in public road repairs and private sector projects, in particular tourism-related, was maintained. The activity in tourism and construction helped to boost the wholesale and retail sector by 4.8% and growth was also recorded for transportation, storage and communication (2.9%), business and other services (3.2%) and electricity, gas and water (5.5%).

Inflation
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At the end of February, 1998, the rate of inflation as measured by the 12-month moving average was 5.6%, compared to 3.5% at the corresponding point in 1997. On a point-to-point basis, the price index fell at a rate of 2.6% during February this year, compared to an increase of 8.9% at February 1997. The reduction in the inflation rate is partly the result of measures taken during the Budget in September last year to alleviate the burden of higher prices caused by the introduction of the Value Added Tax (VAT). The unemployment rate at the end of 1997 was 12.2%, compared with 14.3% one year earlier.

Change in Net International Reserves
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 The net international reserves (NIR) rose by $74.0 million during the first quarter of 1998, following increases of $97.1 million and $112 million for the same period in 1996 and 1997, respectively. While earnings from tourism were estimated at 16.3% higher than for last year, inflows from merchandise exports were lower by 21% because no earnings from sugar were received during the quarter. On the debit side of the balance of payments, retained imports rose by 13.2%, compared to 9% growth between January and March last year. 

The capital account was also weaker than a year earlier. Foreign financing for the private sector was estimated to be about one fifth the amount in the first quarter of 1997, and repayment of foreign debt by Government exceeded project funds by $5.7 million. At the end of March this year, the liquid foreign reserves were equivalent to 13.6 weeks’ imports, compared to 14.3 weeks at December 31, 1997 and 17.5 weeks a year earlier.

Current & Capital Account BOP
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During the first quarter of 1998, the fiscal deficit as measured by the Central Bank, was estimated to be $23.8 million, compared to $34.6 million one year earlier. Revenue rose by 9%, on the strength of increased collections from taxes on incomes and profits and a higher intake from the VAT and excises. Total expenditure was up by about 6%, compared to a 9% rise in the same period last year. Payments for wages and salaries were higher by nearly 31%, as some $30 million in arrears were paid consequent upon the conclusion of a new contract. Outlays on goods and services were up by one fifth. However, capital expenditure fell to $70 million, from $108 million in the first quarter of 1997, as some projects were not fully executed.

Government Operations
(January - March) ($ Million)
  1997 1998
Total Revenue 397.0 432.9
Tax Revenue 356.7 388.2
Other 40.3 44.7
Total Expenditure 431.6 456.7
Current Expenditure 320.1 385.8
Capital Expenditure
& Net Lending
111.5 70.9
Fiscal Deficit 34.6 23.8
Domestic Financing 32.5 29.5
Foreign Financing 2.1 -5.5

During the fiscal year ending in March 1998 the fiscal deficit improved to $26.8 million (0.7% of GDP) from $120.2 million (3.4% of GDP) in financial year 1996/97. Total revenue increased by 19%, thanks to much higher collections of indirect taxes, while expenditure was up by 10.1%.

With excess liquidity in commercial banks on the decline, their net financing of Government’s operations fell by about $38 million between January and March this year, in contrast to an $84.1 million rise in the corresponding quarter of 1997. Credit from the Central Bank also declined by nearly $75 million, after falling by $122.6 million in the corresponding three months of 1997. Insurance companies, credit unions and other non-bank financial entities lent Government an estimated $114 million while the National Insurance Scheme provided $28 million.

At March 31, 1998 the excess liquidity ratio stood at 11.7%, a reduction of 2.3 percentage points from the figure at the same time last year. During the quarter, domestic deposits grew by less than 1%, roughly one fifth of the rate of expansion in the comparable three months of 1997; this resulted mainly from the slowdown in foreign exchange inflows and the purchase of Government securities by non-banks. In contrast, commercial bank lending to private business increased by a little more than last year. The tighter liquidity situation was reflected in an increase in the treasury bill rate to 5.98% at the end of the quarter, from 4.75% at the end of 1997 and 4.91% a year earlier.

OUTLOOK FOR 1998

Real GDP is expected to grow by about 3% in 1998. Tourism will benefit from an influx of tourists from the U.K. and Caricom for the upcoming England Cricket Tour while output of both the manufacturing and agricultural sectors is expected to grow moderately. However, sugar production is likely to be lower in 1998 reflecting an extended period of drought in the planting season last year and reduced acreage owing to a higher incidence of cane fires.

Continued growth in the economy and investment in tourism-related and other private sector projects as well as government’s on-going capital works programme should bolster construction activity, the wholesale and retail trade and other sectors which use foreign exchange.

The initial impact of the VAT should have run its course during 1997 and inflation is expected to revert to the normal rate of about 3%.

The increase in the NIR in 1998 may be larger than in the previous year on the strength of higher travel receipts and increased long term capital inflows.

Government is expected to maintain fiscal prudence with the deficit around 2% of GDP. Revenue should grow by only a moderate amount owing to the removal of the VAT on the basket of food items. However, current expenditure should increase because of a higher wage bill while capital outlays should remain high as the momentum of Government’s capital works programme continues.

Leading Indicators
  1996 1997(p) 1998(p)
Real GDP growth (%) 5.0 4.3 3.0
Inflation rate (%) 2.5 7.6 3.0
NIR (Changes $M) 173.1 30.2 87.2
Import Reserve Cover (Weeks) 15.2 14.3 15.2
Fiscal balance to GDP (%) (3.4) (0.3) (1.4)


April
24, 1998

 

 
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